APRA Superannuation Reporting Standards 160.0, and 161.0

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1 4 April 2014 Mr Neil Grummitt General Manager Policy, Research and Statistics Australian Prudential Regulation Authority GPO Box 9836 Sydney NSW 2001 Dear Mr Grummit APRA Superannuation Reporting Standards 160.0, and The Actuaries Institute is the sole professional body for actuaries in Australia. It represents the interests of over 4,100 members, including more than 2,200 actuaries. Our members have had significant involvement in the development of insurance regulation, financial reporting, risk management and related practices in Australia and Asia. The purpose of this letter is to raise a number of issues relating to the above Reporting Standards and the associated forms, which deal with defined benefit and self-insurance matters. Our comments and queries are set out in the Appendices as follows: Appendix A SRF160.0 (Defined Benefit Matters) Appendix B SRF160.1 (Defined Benefit Member Flows) Appendix C SRF161.0 (Self-Insurance) The key issue that we have identified as needing urgent clarification is in relation to the reporting of the actuarial value of accrued benefits under SRF Items 6 and 7, since this value is only determined each three years for many funds (and even then not necessarily at a reporting date). This issue needs to be addressed urgently to avoid different interpretations and substantial unnecessary work being undertaken. Please refer to Appendix A Item 6 for our detailed comments. Based on our interpretation (see Appendix A Item 1 Query 2 for our comments), we believe the same issue also impacts on: SRF Items 23.1 and 23.2 SRF Item 3 and Item 6* SRF most items SRF Item 4 SRF Item 5 (although this only affects Small APRA Funds) * On a matter of detail, we also query the requirement to report the actuarial value of accrued benefits for defined benefits at Item 6 Column (3) when this may be very different from the DB assets held in the specified investment option e.g. because DB assets are invested across a number of investment options or because there is a surplus or deficit. What is the purpose of this? We recommend strongly that vested benefits data be used (or at least be permitted to be used) in lieu of defined benefit accrued benefit liabilities information on all APRA reporting forms, other than in Item 1.1 of SRF (which does not require accrued benefit liabilities information at the current reporting date).

2 The Institute is raising these queries as actuarial investigations and regular financial position monitoring reports are an integral part of the process to support superannuation fund trustees in completing APRA reporting and our members are frequently being asked to assist trustees understand and comply with the new requirements. Following clarification from APRA, the Institute would be pleased to inform our members regarding the reporting requirements and any modifications to actuarial reports that may assist trustees in meeting the reporting requirements. However to ensure all funds are working on the same basis it would also be desirable that, at least for the major issues, APRA issues clarifications to the industry as a whole, either via updates to the SRFs and the associated instructions or via FAQs (or both). FAQs may be the most effective way to address the more urgent issues, with updates to the SRF material to follow in due course. To assist with prioritisation we have labelled our queries as urgent, ASAP or in due course. Please do not hesitate to contact David Bell, Chief Executive Officer of the Actuaries Institute (phone or david.bell@actuaries.asn.au) to discuss any aspect of this paper. Yours sincerely Daniel Smith President Page 2 of 16

3 Appendix A: Reporting Form SRF Defined Benefit Matters Item 1 Defined benefit measures Item 1 requires reporting of accrued benefits, vested benefits, minimum benefits and net assets available for member benefits (net of ORFR reserves). The instructions state: Report accrued benefits in item 1.1, vested benefits in item 1.2, minimum benefits in item 1.3 and net assets available for member benefits (net of ORFR reserves) in item 1.4. These items are to be reported as the most up to date information available to the RSE licensee at the end of the reporting period. This may be at the date of the last actuarial investigation or it may be based on a more recent estimate. Report the date of the most up to date information reported in item 1.1 to item 1.4 inclusive, in item 1.5. Item 1 Query 1 date of information Say at 30 June 2014, the latest accrued benefits information that a defined benefit (DB) fund has is as at the most recent actuarial investigation date of 30 June On the other hand, the fund has vested benefits, minimum benefits and net assets available for member benefits (net of ORFR reserves) data as at 30 June One interpretation of the above instructions would be to report the accrued benefits information at 30 June 2012 and the other information at 30 June 2014, with 30 June 2014 in Item 1.5. However that would mean that the accrued benefits index calculated at 1.1 would be incorrect, as it would be based on the accrued benefits information at 30 June 2012 and the net assets at 30 June (Technically accrued benefits information for accumulation members and the accumulation component of DB members benefits would be available at 30 June 2014, resulting in further potential for inconsistent reporting.) Urgent clarification required Please confirm that: the fund should report ALL items as at 30 June 2012, that being the most recent date at which all the items are available; more generally, funds should report ALL items as at the same date, being the most recent date at which all the items are available. Item 1 Query 2 Terminology and Availability: Accrued Benefits The instructions indicate that accrued benefits : Report accrued benefits in item 1.1, vested benefits in item 1.2, minimum benefits in item 1.3 and net assets available for member benefits (net of ORFR reserves) in item 1.4. These items are to be reported as the most up to date information available to the RSE licensee at the end of the reporting period. This may be at the date of the last actuarial investigation or it may be based on a more recent estimate. Report the date of the most up to date information reported in item 1.1 to item 1.4 inclusive, in item 1.5. However, the implication of the instructions is that accrued benefits is an actuarial calculation and we understand that the intention is that the accrued benefits figure to be reported is the present value of accrued liabilities (generally) calculated at the most recent actuarial investigation (i.e. the liabilities in respect of accrued benefits as referred to in paragraph 23(c) of SPS 160). Page 3 of 16

4 To avoid potential confusion, it would be desirable for the SRF definition to be modified as follows: Represents the present value of the liabilities of the fund in respect of benefits to which members have an absolute or potential entitlement on account of the length of time as a member of the RSE. Includes: Any amount that would be payable out of those benefits to the member's spouse or former spouse under a payment split. Reference: SIS Regulations, r Alternatively, this definition should be reviewed in conjunction with the definition of Defined Benefit members benefits in SRF 320.0, 601.0, 610.0, and SRF 800.0: Defined benefit members' benefits Represents the present value of expected future benefit payments to defined benefit members and beneficiaries arising from membership, measured using actuarial assumptions and valuations where appropriate. Reference: Australian Accounting Standards Assuming that: the words up to the reporting date have inadvertently been omitted after membership in the above definition; and the word accrued has been omitted from Defined benefit members' benefits for the sake of brevity, we interpret this also to be the actuarial value of accrued benefits and hence would expect that it will be the same number as accrued benefits in SRF We have noted that the SRF definition refers to SIS whereas the Defined Benefit members benefits definition reproduced above refers to Australian Accounting Standards (AAS). Whilst we accept that AAS may use different wording, the wording used does not appear to be from an AAS and in any case it would be preferable for clarity for the same terminology to be used for the same item throughout the Reporting Standards. If there may be, or there is intended to be, a difference, further explanation should be provided as to what the difference may be - for example, if it is considered that the actuarial assumptions used may be different and the SRF actuarial value of accrued benefits is to be based on the funding assumptions and the SRF 320.0, 601.0, 610.0, and SRF actuarial value of accrued benefits is to be based on the AAS assumptions (which may or may not be the same as the funding assumptions). Based on the latest exposure draft of the AAS25 replacement (AASB 105X), we expect it will be very unusual for there to be a difference between the funding assumptions and the assumptions to determine accrued benefits for AAS fund accounts. Clarification required ASAP If it is intended that the accrued benefits figures reported in SRF be consistent with the Defined benefit members' benefits reported in SRF 320.0, 601.0, 610.0, and SRF 800.0, we recommend that the same (modified) term be used in all these standards. (Also note the recommendation at Item 6.) Page 4 of 16

5 Item 1 Query 3 Terminology: defined benefit interests and defined contribution interests The instructions also state: For item 1.1 to item 1.4 inclusive, report defined benefit interests of defined benefit members in column 1 and defined contribution interests of both defined benefit members and members who are not defined benefit members in column 2. Whilst we think this is clear and appropriate (i.e. that the pure accumulation balance component of a defined benefit member s benefit is to be included in the Defined contribution interests column rather than in the Defined benefit interests column), we note that this is not consistent with the definition of defined benefit interest in SIS r1.03aa, which we understand includes both the defined benefit component and any accumulation component. Hence it was necessary to include the definition of defined benefit component in SIS r6.31. As a result, the definition of Defined contribution interests in SRF is also wrong. We also note that Defined contribution interests is not defined in SIS r1.03. Furthermore, whilst accumulation interest is defined in SIS r1.03, it does not include the accumulation component of a defined benefit interest. Clarification required in due course We suggest that appropriate edits be made to the SRF instructions in due course. Item 1 Query 4 Terminology: Vested Benefits For completeness, we note that APRA s Reporting Standards FAQ68 has provided further guidance on the meaning of vested benefits where there are deferred or pension options. Clarification required in due course It would be helpful if the SRF160.0 instructions were updated to reflect this guidance at the next opportunity. Item 1 Query 5 Minimum Benefits and Minimum Benefit Index The following points were made in our submission of 26 March 2013 and are included here as there may not have been time for them to be fully considered before the final Reporting Standards were issued. For some funds, the design of the minimum benefit is such that it is mathematically certain that the minimum benefit is always less than or equal to the standard leaving service benefit. In such cases the minimum benefit may not be calculated by the fund s administration system. In other cases, the amount of minimum benefits at the most recent actuarial investigation date may have been available but has not been included in the actuarial investigation report as there was no requirement to do so either under SIS or under Institute Professional Standard 400 (which currently only specifically requires the inclusion of minimum benefits and minimum benefits coverage where the fund is in an unsatisfactory financial position). As SPS 160 will require minimum benefits to be included in reports on actuarial investigations commenced on or after 1 July 2013, this is a transitional issue. Clarification required ASAP We suggest that the instructions note that this item should be left blank where the information is not available from the most recent actuarial investigation report or a more recent calculation. Page 5 of 16

6 A further issue relates to the treatment of the minimum benefits for former employees with defined benefit entitlements in the determination of the minimum benefit index: it appears from the definition of minimum benefits index in SIS r9.15 that it is intended that the minimum benefits index be calculated with the benefits of former employees (excluding those with defined benefit entitlements for some funds) deducted from total minimum benefits and a corresponding amount deducted from fund assets. However it seems evident from the instructions for SRF that both minimum benefit figures in Item 1.3 are to include the minimum benefits for former employees and the minimum benefits index will be calculated based on the combined amount and total fund assets (excluding the ORFR). We support this approach as it provides greater consistency with the measurement of the other benefit amounts and indices and would be comfortable if, for the purposes of SPS 160 and SRF 160.0, minimum benefits and the minimum benefits index reported are to include the minimum benefits for all former employees. Clarification required in due course However in our view the above treatment of the minimum benefits for former employees should be specifically stated in the SRF 160 instructions and in the SPG relating to SPS 160. A further two issues not raised in our previous submission are outlined below. Whilst we do not make any specific recommendations to deal with these points, we think are worthy of drawing to APRA s attention as they are likely affect the make-up and comparability of reported minimum benefits and may lead to queries and/or inappropriate impressions or conclusions. It is unlikely that many funds will be able to report the minimum benefit component of accumulation benefits accurately for example, to report minimum benefits accurately they would need to exclude from minimum benefits any balances arising from voluntary salary sacrifice contributions or voluntary employer contributions in excess of SG, which in practice may be credited to a single account. Hence some funds may report all accumulation balances as minimum benefits when this is not technically correct. However it is virtually impossible in practice to determine what part of an employer contribution is actually a mandated contribution, given the complexity of the SG system and common employer approaches to meeting the SG, so most employer contributions are treated as mandated contributions. A further source of inconsistency between funds in the make-up of minimum benefits arises from how the accumulation component of minimum requisite benefits is defined in the benefit certificate for a defined benefit fund. In some cases the minimum requisite benefit is defined to include all accumulation balances, including (for example) balances arising from voluntary salary sacrifice contributions which would not form part of the minimum benefit if made to an accumulation fund. In other cases the minimum requisite benefit may be defined to include only balances arising from SG contributions and member contributions (excluding salary sacrifice contributions) although as noted above, in practice this is virtually impossible to administer as employer SG contributions will commonly exceed the precise SG requirement. For noting only. Item 1 Query 6 Self-insured fund issues Funds which self-insure will generally have accrued liabilities in respect of incurred claims (including Incurred But Not Reported or IBNR claims) that should either be added to accrued benefit liabilities or deducted from net assets. Page 6 of 16

7 For funds which do not use self-insurance reserves, allowance for admitted claims will usually be included in the benefits payable deducted in determining net assets, or in accrued benefit liabilities where payable as pension or the benefit is or may be retained in the fund. Allowance for incurred (but not admitted) claims (including IBNR claims) should be added to the accrued liability (including vested benefit and minimum benefit liability) figures reported at Items 1.1 to 1.3. For funds which use self-insurance reserves, either of the following approaches could be adopted: (i) the amount of the self-insurance reserves* could be deducted from the net assets reported at Item 1.4 and the provisions for accrued self-insured liabilities (for which the self-insurance reserves are held) would not be added to the accrued liability (including vested benefit and minimum benefit liability) figures reported at Items 1.1 to 1.3; or (ii) the provisions for accrued self-insured liabilities could be included in the accrued liability figures reported at Items 1.1 to 1.3, in which case the net assets reported at Item 1.4 should include the assets held in the self-insurance reserves. *If self-insurance reserves are held for contingencies other than incurred claims (e.g. a reserve against future fluctuations in claims), it would be appropriate only to deduct the reserve in respect of incurred claims from net assets for the purpose of funding indices. Clarification required in due course (or discussion ASAP if APRA has concerns) It would be helpful if APRA could confirm that either of the above approaches are acceptable for the self-insured funds (which use self-insurance reserves) completing SRF Item 2 Shortfall Limit We note that the Shortfall Limit adopted by the trustee may have been determined on either of the following calculation bases (as per SPG 160): (i) the VBI based on the coverage of the defined benefit component of vested benefits by relevant assets; or (ii) the VBI based on the coverage of the defined benefit members vested benefits by relevant assets. In the Institute s view, basis (i) is more appropriate, however for some funds basis (ii) may be more easily available from the fund s administrative records. We also note that the VBI calculated in SRF Item 1.1 (or calculable from the information in SRF Item 1) will be on basis (i) and therefore will not be comparable with a shortfall limit determined on basis (ii). For noting only. Item 3 Actuarial projection assumptions The assumptions to be reported are the long-term assumptions adopted at the most recent actuarial investigation. We note that the information reported at Item 1 may be at a later date (since item 1 requires the most recent information available) and hence the accrued benefits reported at Item 1.1 could be based on different assumptions than those reported at Item 3. For noting only. [Item 4 No comments] Page 7 of 16

8 Item 5 Certificates Item 5.1 Current effective date of funding and solvency certificate It is unclear how this should be completed if, at year end, the most recent Funding and Solvency Certificate had ceased to have effect and not been replaced. We presume the effective date of the recently lapsed funding and solvency certificate should be entered - it would be helpful if the Instructions confirmed this. Item 5.2 have any notifiable events occurred? We note that a Funding and Solvency Certificate can cease to have effect for a number of reasons other than the occurrence of a notifiable event - refer SIS r9.12(2). We suggest that Items 5.1 and 5.2 be re-framed as follows: Item 5.1 Effective date of latest funding and solvency certificate Item 5.2 Is the latest funding and solvency certificate still effective? Yes/No Alternatively, if the purpose of Item 5.2 is to identify whether there were any events during the year that caused a Funding and Solvency Certificate to cease to have effect, even if the Funding and Solvency Certificate has subsequently been reissued, 5.2 could possibly be left at the current wording and the instructions modified to indicate that yes should be entered if there was a notifiable event or any other event during the year that caused a Funding and Solvency Certificate to cease to have effect. Clarification required in due course We suggest that appropriate edits be made to SRF in due course. Item 6 Age segmentation The instructions say: Item 6 categorises the membership and vested benefits of the sub-fund by age bracket. For a defined benefit RSE or SAF, leave item 6 blank. Reporting basis: report item 6 as at the end of the reporting period. Despite the above-cited reference to vested benefits, the subsequent instructions indicate the following: Defined contribution members' benefits Represents the present obligation to pay benefits to defined contribution members and beneficiaries. Reference: Australian Accounting Standards Defined benefit members' benefits Represents the present value of expected future benefit payments to defined benefit members and beneficiaries arising from membership, measured using actuarial assumptions and valuations where appropriate Page 8 of 16

9 The definition for Defined benefit members' benefits corresponds to what we think Item 1.1 Accrued Benefits is intended to be, not vested benefits. Furthermore, as has clearly been recognised in respect of Item 1.1, this measure is generally only calculated at triennial actuarial investigations. Yet the instructions say: Reporting basis: report item 6 as at the end of the reporting period. So, is the measure intended to be vested benefits, which would be available at each reporting date, or the (present value of) accrued benefits, which may only be available triennially and, even then, not necessarily at the reporting date? Even if there is a regular actuarial investigation effective at the reporting date, the results may not be available in time for accrued benefits liability information to be reported in SRF Further: We note that an age segmentation of accrued benefit liabilities would not normally be calculated at triennial actuarial investigations, so if this is required it will result in additional actuarial work and cost to funds. Some defined benefit funds will have vested and accrued benefit liabilities (such as provisions for Incurred But Not Reported claims for self-insured funds*) which do not relate to specific members or which are impractical to allocate to specific members. Hence an age bracket is not available for these amounts. Please confirm it is appropriate to enter these amounts in column 3 of the Age not available line and zero in Column 2 for the associated member accounts, otherwise these liabilities may be omitted. * This may not be an issue for such funds which use self-insurance reserves and adopt the approach of deducting these from the net assets reported at Item 1.4 see comments above at Item 1 query 6. In our view it would impose unreasonable and unnecessary costs on funds to require them to have accrued benefit liabilities information prepared each year purely for the purpose of APRA statistical reporting. Furthermore, there would simply not be enough time or actuarial resources for accurate member data to be prepared at 30 June each year and then an actuarial valuation performed for every defined benefit and sub-fund in the country in order to provide accrued benefit liabilities information in time for SRF (and other forms which appear to require this information) to be submitted by the due date. A more practical and cost-effective approach would be for vested benefits data to be used in lieu of accrued benefit liabilities information (other than in Item 1.1 of SRF 160.0, which relates to accrued benefit liabilities information at the previous actuarial investigation). It should also be recognised that even vested benefit information may require estimates to be used for some defined benefit members (e.g. pensioners) where an actuarial calculation would be required to assess an accurate vested benefit amount. Urgent clarification required Hence we recommend strongly that vested benefits data be used (or at least be permitted to be used) in lieu of defined benefit accrued benefit liabilities information on all APRA reporting forms, other than in Item 1.1 of SRF This approach could be reviewed when the eventual replacement to Accounting Standard AAS25 is finalised and comes into effect. Page 9 of 16

10 Reporting level Lastly on this Item, the instruction For a defined benefit RSE or SAF, leave item 6 blank is confusing. The other comments in the Instructions regarding the reporting level for different types of fund are not entirely clear either. We understand the intention is that: where a defined benefit fund has sub-funds, it is to complete a separate SRF for each of its sub-funds and for any remainder of the fund that is not a sub-fund, but NOT for the fund as a whole; and where a defined benefit fund does not have sub-funds, it is to complete SRF 160.0, other than Items 6 and 7, for the whole fund (as the whole fund Item 6 and 7 information will be provided in SRF 610.0). Clarification required in due course (or discussion ASAP if not correct) If this is correct, it would be helpful if this was clearly stated in the Instructions. If it is not correct, please advise us of the intended operation. Item 7 Membership type segmentation Similar comments apply here as set out for Item 6 above. Page 10 of 16

11 Appendix B: Reporting Form SRF Defined Benefit Member Flows Reporting level See comments at the end of the Item 6 section of Appendix A above. Terminology: defined benefit interests and vested benefits See comments at Query 3 in the Item 1 section of Appendix A above. We assume that references to defined benefit interests should actually be to defined benefit components. Re vested benefits, please see comments at Query 4 in the Item 1 section of Appendix A above. Item 1 - Vested benefits and net assets Please see the comments at Appendix A Item 1 Query 6 relating to the determination of vested benefits and net assets for self-insured funds. The approach adopted for SRF Item 1 should be consistent with that adopted for SRF Item 1. Item 2.3 Employer sponsors that did not pay the recommended contribution rates For employer sponsors that did not pay the recommended contribution rates during the quarter, the fund is required to report the number of such employer sponsors (Column 2) and the amount of contributions paid (Column 3). Example 1: If an employer paid more than the recommended contribution rates (say $1,500k instead of $1,450k as they were a month late in reducing to a lower recommended rate), are they to be counted in this line (i.e. contributing 1 to Column 2 and $1,500k to Column 3)? If this is required to be reported, why? Example 2: If an employer paid $50k less than the recommended contribution rates in one month due to a payroll error and this was corrected the following month (so they paid $1,500k for the year which was the correct overall amount), are they to be counted in this line (i.e. contributing 1 to Column 2 and $1,500k to Column 3)? If the $1,500k is required to be reported, why is this amount useful to know? Clarification or discussion required in due course Item 2.4 Employer sponsors that did not pay certified minimum contributions at the recommended frequency? For employer sponsors that did not pay the certified minimum contributions at the recommended frequency during the quarter, the fund is required to report the number of such employer sponsors (Column 2) and the amount of contributions paid (Column 3). What is the relevance of the amount of contributions paid? We note that Item 2.5 requires reporting of any amount of contributions in arrears. Example 3: If an employer paid earlier than recommended (e.g. $100k monthly where the certificate specifies $300k quarterly), are they to be counted in this line (i.e. contributing 1 to Column 2 and $300k to Column 3)? If this is required to be reported, why? Example 4: A funding and solvency certificate (FSC) specifies that contributions are payable monthly and due at the end of the month to which they relate. SIS r9.08(4) allows 28 days after this for the contributions to be received without causing the FSC to lapse. Thus for example, May Page 11 of 16

12 contributions would be due on 31 May. If they were paid on 1 June would this employer and the amount of contributions they paid for the quarter be required to be reported at Item 2.4? Or is it only if the contributions were unpaid by the SIS deadline of 28 June? Given the instructions on this Item refer to SIS r9.08(4) and r.9.10(1)(g), we expect that the latter is intended, but would appreciate confirmation of this. For clarity, it would be preferable is this line item were re-worded Employer sponsors that did not pay certified minimum contributions on time and the Instructions referred to employer-sponsors having not paid the minimum contributions within the time required under SIS (i.e. by 28 days after the due date specified in the Funding and Solvency Certificate). Clarification or discussion required in due course Item 2.5 Employer sponsors that have contributions in arrears For employer sponsors that have contributions in arrears, the fund is required to report the number of such employer sponsors (Column 2) and the amount of contributions paid (Column 3). The Instructions say: Contributions in arrears Represents the amount of contributions (as recommended by the actuary) expected to be received by the RSE but which were not received by the expected or agreed date. Includes: employer contributions. The wording employer sponsors that have contributions in arrears (emphasis added) implies the information relates to contributions outstanding at the reporting date. Please confirm this is correct. In the case of the fund in Example 4 above, if the reporting date is 30 June and June contributions were not received by 30 June (being the due date specified in the FSC), would these contributions be classified as in arrears or would they not be regarded as in arrears as SIS allows a further 28 days for them to be paid without the FSC lapsing? Clarification or discussion required in due course Item 3 Benefit Payments The instructions indicate that benefit payments Represents lump sum benefit payments and pension benefits paid directly to members. Excludes: rollovers and successor fund transfers. Reference: SIS Regulations, Divisions 6.2 and 6.3; Superannuation Industry (Unclaimed Money and Lost Members) Act 1999, Part 4A. Whilst benefit payments as defined in SIS may exclude rollovers and successor fund transfers, we cannot understand why it would be appropriate for SRF to collect information on benefits paid excluding rollovers and successor fund transfers. It is likely that the majority of benefits will be paid as rollovers rather than directly to members. The information collected on this basis would be useless at best and misleading at worst. In fact many funds will probably include rollovers as they would commonly be regarded as benefit payments. Clarification or discussion required in due course We strongly recommend that the benefit payments to be reported include rollovers and successor fund transfers. Page 12 of 16

13 Appendix C: Reporting Form SRF Self Insurance There are a number of references to reinsurance or reinsured in this SRF. We suggest that explanation is required of what these terms are intended to mean in the context of a self-insured superannuation fund. We suggest notes to the effect that: (i) (ii) where an external insurance policy provides cover determined at individual member level, this external cover should be treated as acquired insurance and reported under SRF (only the retained self-insured risk is to be reported under SRF 161.0); and where an external insurance policy provides cover which is not determined at individual member level (eg. catastrophe cover or stop-loss cover), this is termed reinsurance for the purposes of SRF Alternative terms which would avoid the use of the potentially confusing term re-insurance would be proportional acquired insurance for (i) and non-proportional acquired insurance for (ii). The instructions also appear to use a number of definitions that should be modified to be appropriate for self-insurance arrangements, such as: Life insurance Represents a benefit, in respect of each member, that is payable only in the event of the death of the member and which is provided by taking out insurance.. Insurance premium Represents an amount paid for the provision of insurance under an insurance policy Insurance premium rebate Represents a rebate received from the insurer, in respect of members' insurance premiums paid to that insurer Note that we would be surprised if rebates were ever relevant to self-insurance premiums. Our other comments on specific items in SRF are set out below. Reporting level The reporting level is at RSE level rather than sub-fund level. However SRF makes provision for separate reporting for each self-insurance arrangement within an RSE. We presume the purpose of self-insurance arrangement is to cater for sub-funds, so that a defined benefit fund which is comprised of a number of sub-funds would only complete one SRF 161.0, with each subfund with self-insurance reported within the single form, using a separate self-insurance arrangement identifier for each sub-fund. Is this correct? Who is required to complete SRF 161.0? Also, it seems that RSEs that do not have any self-insured arrangements are not required to complete SRF 161.0, although we cannot see anywhere that this is specifically stated. We expect that this will include funds which have ceased self-insuring and have externally insured both ongoing risk and liability for residual claims relating to events occurring prior to the cessation date. A more difficult question relates to funds in run-off mode i.e. funds that ceased self-insuring ongoing risks some time ago but retain liability for residual claims relating to events occurring prior to the cessation date. We suggest that such funds only be required to complete SRF if there has been self-insurance claims activity in the 2 years prior to the reporting date. Page 13 of 16

14 Use of estimates Presumably the main purpose of SRF is to monitor the order of magnitude of self-insurance exposure and claims activity and hence it should be acceptable for reasonable estimates to be used where information as at the reporting date is not available see, for example, our comments on Columns 8 and 9 of Item 1.1. Confirmation or discussion required in due course Item 1.1 Actuarial investigations and funding Column 3 (Closed) Column 3 asks whether the self-insurance arrangements are closed to new members. We suggest Run-off claims only be added to Yes and No. Columns 8 (Recommended self-insurance funding) and 9 (Actual self-insurance funding held) These columns require an amount to be entered as at the end of the reporting period. Where self-insurance reserves are utilised, the actuary may not have had time to review the adequacy of the reserve as at the end of the reporting period and make recommendations within the required timeframe for SRF to be lodged. A practical approach would be to permit an estimate to be provided in Column 8 based on the most recent actuarial assessment and recommendations. Where other arrangements apply (i.e. only defined benefit funds), allowance for funding of selfinsured claims will generally be built in to the recommended contribution rates. Admitted claims would be allowed for in pending benefit payments or included in vested benefits. Hence any recommended funding amount at the end of the reporting period would generally relate only to incurred but not admitted claims (both reported and unreported)*. Please confirm that this is intended to be the amount reported at Column 8*. Assuming this recommended amount is provisioned for as at the end of the reporting period, the same amount would also be shown in Column 9*. Note that if the expected amount of incurred but not admitted claims was not considered financially significant relative to the overall DB liabilities, it may be recommended that no provision is necessary. *Please also refer to our comments at Appendix A Item 1 Query 6 relating to the determination of vested benefits and net assets for self-insured funds in particular that (in our view) where selfinsurance reserves do not apply the recommended allowance for incurred but not admitted claims should be included in the accrued liabilities reported at Items 1.1 to 1.3 of SRF In such cases the amounts reported at Columns 8 and 9 of SRF Item 1.1 would not form additional liabilities not allowed for in SRF or reporting. Confirmation or discussion required in due course Item 1.2. Insurance type by member accounts and aggregate cover Our questions relate to the treatment of self-insured disability income benefits: Columns 6 and 7 relate to income protection insurance, which the instructions say represents temporary incapacity cover. If the self-insured disability income benefit is payable on total disability, whether permanent or temporary, is the amount of cover to be reported both at Columns 4 and 5 (Total and permanent disability insurance) and Columns 6 and 7 or only at Columns 6 and 7? We suggest only columns 6 and 7. Page 14 of 16

15 For column 7, how is the aggregate cover determined for example based on insured annual income benefits or monthly income benefits or a multiple of either of these? We suggest monthly income benefits for consistency with Item 2.1 Column 4. If there is an income benefit payable on total and permanent disability, irrespective of whether an income benefit is also paid on temporary incapacity, if the fund must report in respect of this benefit at Columns 4 and 5, how is the aggregate cover amount to report at Column 5 to be determined? In our view there would be dubious value in any information that mixes lump sum and income benefits and hence we recommend against including income benefits here. This would mean separate reporting of income benefits payable on total and permanent disability. Similar issues arise for income benefits payable to spouses and children on death. Where a member, or their beneficiary, has a choice of a lump sum or income benefit it would be helpful if confirmation could be included that only the lump sum is included. For funds in run-off mode, we expect that Item 1.2 would show nil or blank in each column. Please advise if this is not correct and if so, what would be expected. Confirmation or discussion required in due course Item 1.3. Premiums and rebates We expect that this item is not relevant to defined benefit self-insurance arrangements and such arrangements would show nil or blank in each column. Even for a fund using self-insured reserves, we do not understand what is intended to be shown in Columns 3 to 5 the heading refers to Insurance premium payments to RSE licensee (emphasis added). We don t understand why any amounts in respect of self-insured arrangements would be payable to the RSE licensee. Clarification is required. Even for a fund using self-insured reserves, we do not understand what is intended to be shown in Column 3 (Value paid by RSE) or Column 6 (Insurance premium rebate from RSE licensee). Clarification or discussion required ASAP Item 2.1. Claims in progress by insurance type For income protection insurance claims which are in the course of payment at the reporting date (i.e. monthly benefits are being paid subject to the member not returning to work and regular reassessment), it is unclear whether they should be reported in column 2 or 3 (and 4) or not at all. We suggest they be reported at Column 3 and 4. We note that the instructions are clear that the amount to be reported at Column 4 is based on the monthly benefit. Confirmation or discussion required ASAP Page 15 of 16

16 Item 3. Claims paid Where there is an income benefit payable on total and permanent disability (TPD), different defined benefit funds may operate different approaches to the ongoing treatment of the benefit: (i) (ii) One approach which is common for defined benefit pensions is to treat the present value of expected future TPD pension payments as a lump sum self-insurance claim at the time the member is assessed as TPD; the TPD pension is then be treated as an accrued and vested benefit and the TPD pensioner is regarded as not having any ongoing self-insured liability; ongoing risks associated with funding the TPD pension are then regarded as just the normal DB funding risks without any self-insurance risk component; Another approach is to treat the TPD pension payments as an ongoing self-insurance claim, with the self-insured claims provision making allowance for the present value of expected future TPD pension payments (this is the approach that would necessarily be used for an accumulation fund, where payments would be made from the self-insurance reserve). We consider that either of the above approaches should be permitted for a defined benefit fund. Where approach (i) is applied, we propose that the lump sum amount be reported as the claim value in the Income protection insurance row of Item 3.1 in the reporting period that the member is assessed as TPD. The claim would then be regarded as completed and not relevant for future self-insurance reporting. Confirmation or discussion required in due course Item 4.2 Reinsurance premiums We do not understand what Column 2 (Reinsurance premiums collected) is intended to cover. This would be zero in a defined benefit fund. In an accumulation fund it is unlikely any separate premium is collected for reinsurance. Nor do we understand why Column 4 (Reinsurance premiums paid by RSE licensee) and Column 5 (Reinsurance premiums paid by an employer sponsor) are necessary. We would expect all Reinsurance premium payments to be made from the fund (Column 3). On the basis that the policy would be owned by RSE licensee as trustee for the fund, our understanding is that any employer-paid premium would be treated in the fund s accounts as an employer contribution to the fund and an insurance premium paid by the fund. Clarification or discussion required ASAP Page 16 of 16